Contrary to popular opinion among many in the multifamily industry, Gen Y is already starting to abandon city living. Here's why.

Millennials are going to
shun material goods, never own a car, and live in small spaces in utopian urban
cores riding their bicycles or taking public transportation to their green,
open-space offices. Forever!

This, or
something like it, is the conventional wisdom in the market and wishful
thinking in the apartment industry. Although some surveys results seem to agree
with this popular opinion, research shows that people’s needs and preferences
change over time and that people are terrible at thinking about and planning
for the future, especially when they’re young.

Imagine what the
baby boomers would have said in such surveys when they were that young!
Moreover, the conventional wisdom is already proving untrue. The older tranches
of Gen Y are already moving out of urban cores and into the suburbs. While you
might be shocked to read that, let's examine why this is true based on data,
and not conjecture.

First, the
portion of Gen Y that’s been living in urban cores is getting married and
having children. Wait, what about the death of marriage in the United States
and the rise of the single-person household? While that claim is undoubtedly
true to an extent, it reflects a rather sophomoric understanding of the data.

The reality is
that marriage and children continue to be popular among the
well-educated—exactly the kind of Gen Yer living in urban cores. The marriage
rate for males with a bachelor's degree is 76%, while for those with a high
school diploma, it falls below 50%.

Make no
mistake—millennials are the best-educated generation in history and have
similar goals as prior generations. They want to get married, be good parents,
and send their kids to college. Living in urban cores is incompatible with that
lifestyle for most of them. All of the arguments that follow derive from this
fact.

The Quest for
SpaceLet's start with
the size of the living area.

If Gen Yers are
going to rear their 2.1 kids (the replacement rate, which is approximately the
rate at which nonimmigrant domestic couples reproduce in the U.S.), they’re
going to need more than the 861 square feet that can be found in the average
apartment in urban cores. Believe it or not, Gen Y doesn't actually enjoy
having their bed in their kitchen! And as anyone with children knows, one
spends more time at home with their kids than without them. It’s not so easy to
set up camp at a Starbucks for hours at a time with toddlers in tow.

Although there’s
been a construction boom in urban areas over the past few years, most of the
units being constructed are too small for a family of four. Families are not
the source of demand for apartments today, and so units aren’t being built to
suit their preferences.

Once they start
reproducing, or at least thinking about it, Gen Yers are going to seriously
consider the quality of the school system where they live. Of course, most
urban cores have notoriously bad school systems. Sure, there are some bright
spots, but, by and large, they’re few and far between, and rolling the dice on
one's children's education is something most responsible parents won’t do.

Despite a renewed
focus on education in urban areas, it’s highly unlikely standards are going to
increase significantly in the next five to 10 years—certainly not to the level
of the nearby, beckoning suburbs that are well funded through local property
taxes.

Additionally,
many cities are sitting on massively underfunded pensions. As we’ve recently
seen in Detroit, while public obligations might be scaled back a bit, they
aren't going away completely, and they’re indeed massive.

Morningstar
estimates, for example, that Chicago’s unfunded pension liability is $18,596
per inhabitant; New York’s, $9,842 per inhabitant. So, one of two things, or
some combination thereof, will have to occur: Either taxes are going to have to
increase, or services are going to have to be cut.

As anyone who has
studied basic urban economics knows, a sure way to get people to move out of a
municipality is to either raise taxes without a commensurate increase in
services or cut services without a commensurate decrease in taxes. As residents
flee the ticking time bomb of unfunded pensions for the suburbs, it will only
make the problem worse.

Urban LiteGen Yers might be
young and idealistic, but they’re not stupid. The closer they get to marriage
and having children, the more they’ll begin thinking about these things, just
as previous generations did. Surely, some of them, likely the best paid (who
can afford private schools), will stick around urban areas. But that’s always
been true, even during the 1970s and 1980s, when cities were rather dirty,
dangerous places.

When Gen Y
disembarks for the suburbs, it won’t be to the strip-center–ridden dystopia
you’re likely imagining. Rather, they’ll look for places that have urbanlike
downtowns and excellent access to infrastructure (especially public
transportation) that can take them in and out of the urban cores where the jobs
are located.

About the Author

Ryan Severino, CFA, is chief economist at JLL, a financial and professional services firm specializing in commercial real estate services and investment management. He is based in New York and New Jersey. He is also an adjunct professor at Columbia University and NYU.